As a rule, governments do not like to turn off major sources of revenue or return money they have already taken through policy or regulatory action. That said, the Trump Administration is currently facing a major challenge to its plan to impose tariffs on global trading partners.
Tariffs Are Projected to Be a Non-trivial Source of Revenue for the U.S. Government
U.S. Tariff Revenue by Year
Data Source: The Global Statistics
On Friday, August 29, the U.S. Court of Appeals for the Federal Circuit affirmed the Court of International Trade’s ruling on the illegality of Trump’s tariffs imposed under the International Emergency Economic Powers Act (IEEPA). It was a 7-4 ruling in support of the previous ruling. However, the court delayed the enforcement of its decision until mid-October to give the Administration time to appeal to the U.S. Supreme Court.
Appeals Court Refines Boundaries of Trade Emergency Authority
Of central importance here, President Trump has claimed the United States is in an emergency situation with respect to trade imbalances. And the tool he has used, the IEEPA, was established in 1977 to allow the President to exercise special powers during a declared national emergency. Those powers include freezing assets, blocking transactions, and regulating economic activity in response to specific “unusual and extraordinary threats” from abroad. The use of the IEEPA allowed the Trump Administration to quickly and dramatically implement tariff plans, which spurred the renegotiation of some trade deals.
But last Friday the Appeals Court affirmed the previous ruling, saying the current use of tariffs is too broad and sweeping compared to the intended narrower focus of the IEEPA. While many had predicted this ruling, it ended up being closer than expected, with 4 of the 11 judges dissenting. Importantly, the ruling does not apply to all tariffs, such as the targeted sector-specific tariffs on copper and steel, but does apply to broad country-based tariffs. It also does not impact situations in which tariffs have been replaced by negotiations of country-level trade deals.
Don’t Write Off Country-based Tariffs Just Yet
The Trump Administration has already stated its intention to appeal the recent decision to the U.S. Supreme Court. FEG expects the Supreme Court will hear arguments by mid-October and potentially provide a ruling by January 2026, so the late August decision is only one step in a longer process. While many predicted the Appeals Court decision, the U.S. Supreme Court's ultimate ruling may be less predictable—despite the Administration’s impressive track record of garnering support from the high court’s conservative majority. Aside from either an affirmation or reversal, the court could make a partial ruling or even send the case back to the lower court on procedural grounds.
The bottom line is that tariffs are not likely to go away anytime soon, which could have an impact on government revenue as well as the U.S. inflation outlook. Tariffs have been part of the bedrock of the Trump Administration’s economic policy, and the use of the IEEPA allowed for quick implementation. Other options for imposing tariffs take longer to implement under the law, but the Trump Administration could seek to leverage the Smoot-Hawley Tariff Act, the Trade Act of 1974, and the Trade Expansion Act of 1962 to meet its goals of implementing tariffs. Plan B, in other words, is already under discussion in the West Wing.
Assessing the Potential Market Impact
Tariffs, in fact, regularly generate billions of dollars of revenue for the U.S. government, some of which is currently being used to offset the deficit spending impact of the “One Big Beautiful Bill.” The Trump Administration will be loath to give this up, both for the revenue impact and the political loss it would represent to the executive branch.
As this is written, the initial market reaction has been mixed, as the ultimate decision and implications will take time to emerge. However, the August 29 judicial development comes after an incredible run for U.S. equity markets, which have strongly bounced off the April lows that were triggered by the “Liberation Day” tariff announcements. The biggest move, thus far, has been on longer-dated U.S. Treasury yields, as any loss of tariff revenue increases future budget deficits.
FEG believes investors should be prepared for more market volatility this fall, which historically has tended to see an uptick in volatility regardless of which party’s policies are being debated. Of course, markets hate uncertainty, and the quotient of tariff uncertainty is being compounded by challenges to the independence of the Federal Reserve and the potential for a government shutdown. So far, 2025 has been a bullish year after recovering from a dramatic market swoon, and while FEG expects markets to remain resilient to the interplay of governmental checks and balances, there will assuredly be unavoidable bumps.
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